Three years since the effective launch of the Cyprus VAT Yacht Leasing Scheme, the Cyprus Tax Department has recently introduced the Cyprus VAT Private Aircraft Scheme (CPAS), which refers to the leasing of aircraft for private purposes. The Scheme has sparked worldwide interest in Cyprus, with the possibility of lowering VAT rates to as low as 4.37%.
A Private Aircraft Leasing Agreement is considered a supply of services for VAT purposes and is taxable at the standard rate of VAT of 19%, with reference to the use of the aircraft within the European Union airspace. It enables the lessor (owner of the aircraft) to contract the use of the aircraft to a third party, the lessee (the person who leases the aircraft) in return for a consideration. Upon the completion of the lease period, the lessee may exercise the option to purchase the aircraft at an additional consideration.
Under the CPAS, only a percentage of the lease value will be subject to Cyprus’ standard VAT rate of 19%. Since it is practically impossible to establish the amount of time that an aircraft spends within the EU’s airspace, the Tax Department has determined that the the effective rate of VAT applicable, is calculated based on the percentage of the time the aircraft is deemed to fly within the EU airspace and based on the type of aircraft involved e.g. Piston, Turbo, Jet and the maximum take-off weight, enabling the effective rate of VAT to be reduced to as low as only 4.37%.
The following table determines the percentage of lease which is subject to VAT as well as the effective VAT rates of each type of aircraft:
Irrespective of the above VAT guide, if any private aircraft is used entirely and exclusively within Cypriot airspace, the leasing is subject to VAT under the standard rate of 19%.
Important conditions that should be taken into account while considering the effective use of the Scheme include the following:
The procedures taken for the approval of the Scheme are summarised as follows:
For new aircraft, the original or certified purchase invoice and the original or certified purchase agreement must be provided. For used aircraft, a recent independent valuation from a registered independent valuer as well as the original purchasing invoices and/or agreements must be provided.
To illustrate the above mechanics of the Scheme, the following is a numerical example depicting the VAT and Corporate Income Tax arising from the aircraft registration and CPAS:
VAT due on CPAS:
AMOUNT IN EUR (€)
VAT due upon payment of the 40% (i.e. €24,000,000 (A)
€912,000 (€24,000,000 * 3.8%)
VAT due upon payment of purchase of the aircraft at end of lease period for €1,500,000 (B)
€285,000 (€1,500,000 * 19%)
Balance to be paid on initial, up to and including the final installment (i.e. 59 installments if you exclude the first installment where down payment is made)
€37,500,000 (€60,000,000 + €1,500,000 - €24,000,000)
Total VAT due on all regular monthly installments (C)
€1,425,000 (€37,500,000 * 3.8%)
TOTAL VAT DUE ON LEASE SCHEME (A + B+ C)
Effective VAT rate
VAT due for an aircraft not using the Scheme
Private use outside the scheme
Outside the scheme liability
€11,400,000 (€60,000,000 * 19%)
Under the scheme liability
Corporate Income Tax Due on CPAS
CypCo, being the lessor, is a Cyprus company, which if a tax resident, is subject to Corporate Income Tax (CIT) at the flat rate of 12.5%. Although in theory the CypCo can also be a non resident Cyprus company (i.e. company whereby management and control is not exercised in Cyprus) and thus not subject to Cyprus tax - we do not advise this due to foreign tax implications that may arise.
Following the numerical example above, the CypCo, if a tax resident in Cyprus, would be subject to 12.5% CIT on the €3,000,000 profit that would ensue during the life of the lease agreement, hence €375,000 in tax. (Any interest expense and all administration expenses such as accounting, audit etc. will be disallowed for tax purposes for maintaining the 5% profit margin).
The effective VAT and tax rate, combined, is 5% as per the numerical example above.
How we can assist
Savva & Associates and our team of VAT experts can assist you with the full implementation of the CPAS, substantially decreasing your VAT exposure upon purchase of a private aircraft within the EU. Our services extend to setting up and the ongoing administration of the appropriate aircraft-owning company in Cyprus, aircraft registration, and undertaking all necessary tax and legal arrangements and procedures on your behalf.
For more information regarding the CPAS, please contact Charles Savva at +357 22 516 671, or by email firstname.lastname@example.org.